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Compensation  >>   Bonus Eligibility When Employee Resigns Search Discussion Posts
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Bonus Eligibility When Employee Resigns  
Posted: 02/21/2011 05:35am   247 Views

Our plan currently provides that if the person is an an active employee through calendar year end, they remain eligible for the bonus.  We are looking to change the rule to require the person be an active employee at the time bonuses are actually paid, near the end of February.  Is one approach better than the other?  Does it make any difference?


Bonus Eligibility When Employee Resigns  
Posted: 02/21/2011 12:02pm  
   (4 ratings)

The answer to this question is only dependent on your company's practice and philosophy, and the orginal purpose for why you opted to adopt a performance bonus in the first place.  If it was exclusively to motivate increased levels of performance in order to achieve some goal or to accomplish some objective - and assuming the person met the established performance thresholds to entitle them to some level of bonus, then you would make every effort to pay the bonus, even if the person had resigned or retired.

If there was more in the way of a multiple purpose to the performance bonuses (performance recognition and retention), then if that was one of the purposes, and if they left the organization before the bonuses were paid, then there's no point/obligation to paying the bonus. 

Our own practice and philosophy goes almost exclusively to the aspect of performance, consequently we established very specific rules that if the person had a level of qualifying performance and they were an active employee at the time that performance bonus deliberations begin (our qualifying threshold varies between pay pools), and if the person meets or exceeds the payout threshold, we pay the bonus, whether the person is actively employed at the time the performance bonuses are actually paid, or not. 


Bonus Eligibility When Employee Resigns  
Posted: 02/21/2011 03:09pm  
   (2 ratings)

Does this analogy help? Do you tell a resigning employee on their last day of work, sorry we can't pay you for your last two weeks of work because when the payment would be made you won't be an employee of the company?

Your policy might influence when some employees resign.


Bonus Eligibility When Employee Resigns  
Posted: 02/22/2011 12:46pm   Revised: 03/01/2011 11:01am  
   (2 ratings)

Many of my clients have changed to their payout policy by defining employee eligibility to "must be employed at the time of payout" for the reason that you have described.  It makes a difference in terms of forfeited funds but may not make a difference in employee retention.  However, I have seen situations when this issue has impacted the final employment decision (in considering all the factors and what they would "walk away" from to make a change).

Many executives will use the "end of the year" bonus for negotiating purposes.  In other words, the new company will have to pay the bonus amount (that the employee would have earned) if the employee walks away from it.  Since many companies do not want to pay this amount and December is a relatively slower time of the year (for many businesses), it is an easy decision to delay the employee's start date until January 1.

Obviously, this policy change must be clearly stated in your plan documents.


Bonus Eligibility When Employee Resigns  
Posted: 02/23/2011 02:15pm  

We have changed our eligibility back to "must be an active participant through December 31 of the Plan year" because of tax deductibility issues with the changing IRS landscape.  You may wish to pursue the tax deductibility of the payouts for executive and non-executive plans based on your eligibility rules.


Bonus Eligibility When Employee Resigns  
Posted: 03/01/2011 10:33am  

The tax deductibility drove us from a "must be employed at the time of payout" to "must be an active participant through December 31 of the Plan year". It really should be looked into further.


Bonus Eligibility When Employee Resigns  
Posted: 03/01/2011 11:03am  

Additional comment:  

You must also consider the tax deductibility issue that others have described.  Finance should always be a stakeholder regarding any significant changes to incentive plans.


Bonus Eligibility When Employee Resigns  
Posted: 03/01/2011 01:07pm  
   (2 ratings)

A couple of items to think about, things I have run across in my career:

Some companies I have worked for believed that if you worked the full plan year without performance issues and the company paid out a bonus for that plan year, you would receive the bonus even if you left the business after January 1.  This was not based on entitlement, but rather the core set of values on how we wanted employees to be treated, and our desire to build trust with the employees as a management team.  A bit of practicality to note, a new company will either buy out the bonus or wait it out.  These included management bonuses as well as sales bonuses - all based on annual results.

Other companies took another approach and felt that the bonus was not earned, regardless of audited results or performance of the individual, unless the individual was employed at the time of payment.  This brought a few court challenges - allegedly the company moved the payment date to avoid paying to an individual it knew was leaving, and that allegedly the performance period was the plan year, not this "arbitrarily" defined period of when payment was made.  The perception of employees was this was being "cheap".

To offset the challenge on these, one company chose to define the bonus (sales) as both selling and servicing the sales after the period had concluded and set up a defined period in which payments would be made.

All in, I guess you have to evaluate the employment "Brand", the principles the bonus is built on, taxation and the company values.  In my opinion, carefully evaluating alignment with Brand and values while balancing the financial aspects is going to give you the best, defensible result with employees and management.


Bonus Eligibility When Employee Resigns  
Posted: 03/01/2011 04:44pm  

I don't agree with some of Anon #4 ascertions since most companies do not "arbitrarily" make bonus payout decisions.  Plan administration decisions are defined by the plan document.  There are always trade offs with any business decision.  You can't please them all...

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